We are now about three years into the recession, and there’s no denying that property prices in the U.S. are still at affordable lows. As winter creeps up on us, many Canadians are likely researching just how much a nice little vacation home might cost.
I applaud that line of thinking (as soon as winter hits, I drink Vitamin D drops almost as quickly as the snow falls in a blizzard), but I urge caution on one major issue: if you come across a short sale property and decide to put an offer on it, make sure you have legal counsel to guide you through your real estate transaction.
Short sales occur when a homeowner needs to get out of a mortgage because they are in financial trouble, and they can’t pay off their loan. The seller will put their house on the market, price it attractively and then cross their fingers and hope that their lender will approve the sale and accept its proceeds as full payoff for their loan – even if the seller will fall short of paying back everything they owe.
While Altro & Associates, LLP is known for cross border estate and tax planning, we are also experienced at guiding our clients through real estate purchases in the U.S. We specialize in advocating for our clients throughout their purchasing process, which becomes even more important when a property is being sold short.
I’ll use a real example from our practice to illustrate my point. Earlier this year, Jacques and Alice found a beautiful condo in Miami Beach that caught their eye. Their realtor notified them that the sellers had two mortgages on the property from a bank and a private lender. The sale would have to be approved by both lenders because it would be a short sale.
Jacques and Alice decided to go forward – but they called us as soon as their offer was accepted, knowing that it would be a long road to their closing date. It’s not only been a long road, but an incredibly bumpy one too. Below is a long list of the short sale troubles that Jacques and Alice have had to endure:
- Short sales often close at the last minute; the lender takes its time approving the sale and then demands a quick closing date with very little notice. This is what happened to Jacques and Alice. We advised the seller that we could meet the closing date deadline when they proposed it to us, but that our clients’ realtor in Florida would have to do a walk-through of the property before we would release any funds to the seller.
- When the realtor showed up at the condo to make sure it was still in good condition, the locks had been changed and there was – wait for it – a squatter inside!
- Needless to say, instead of celebrating a closing, eviction proceedings began. While the court proceedings dragged on, we needed to get multiple closing date extensions from the bank and the private lender.
- Of course, to complicate an already complicated deal, our contact for the private lender was on vacation during this time, so it was extra difficult to obtain sign-off on the closing date extensions that we needed to save the deal.
- The eviction proceedings went on for so long that the bank notified us that they were going to foreclose on the property, which would effectively kill our clients’ deal. They eventually changed their mind on this, but not before the mention of a foreclosure created heartache for our clients.
- The eviction proceedings eventually ended, and once again, we were ready to close. This time around, however, we were notified that our clients would have to pay thousands of dollars extra in condo assessments that had become due.
- Even though the purchase contract clearly states that the sellers were responsible for all such assessments, they were unable to afford the assessment payments, so those payments fell to our clients, if they chose to accept them as their burden.
- Before agreeing to this extra cost, we advised our clients to review a draft settlement statement, also known as a HUD. A HUD is a document drafted by the U.S. title company in charge of creating the closing documents for a transaction. The HUD outlines the financial breakdown of a real estate transaction for both parties.
- When we received the draft HUD and compared it to the previous one we were using before the discovery of the squatter, we noticed that the amount owing by our clients was actually LESS than before – even though they were apparently being charged more for the assessments!
- If Jacques and Alice had reviewed this HUD and agreed to pay for the assessments, thinking they were somehow SAVING money, they would have been pleasantly UN-surprised upon receipt of the final HUD at closing, which would undoubtedly include the thousands of dollars in assessments that they would have “agreed” to paying after reviewing the incorrect draft HUD.
- We noticed the error in the draft HUD, however, so that potential problem was avoided. We requested a revised HUD, which came with several more errors in other sections. Further drafts were also incorrect.
- Once we received a HUD that was correct, we agreed to move forward with closing, but not before requesting that the title company do an updated lien search to make sure the property was free from any encumbrances.
- Lo and behold, the night before closing, a federal tax lien came up on the title search, and we were once again delayed!
Not surprisingly, Jacques and Alice have still been unable to close on their property.
During the winding road described above, we advocated for Jacques and Alice by ensuring that the title company provided correct, up-to-date information at all points. We caught errors that could have easily gone unnoticed by reviewing all documents with a fine-toothed comb and knowing exactly what to look for. We coordinated and corresponded with the various parties involved in this complicated transaction so that our clients didn’t have to be the quarterbacks on so many moving pieces.
In short (no pun intended!), title companies create closing documents, but they don’t work on behalf of buyers. A really great realtor is a huge asset in a transaction like the one detailed here, but he or she doesn’t review important closing documents to make sure that you are legally protected.
Real estate lawyers are there for you, and you alone. When Jacques and Alice finally close on their dream home in Florida, we will be there with them, and they will have the peace of mind that comes with knowing that they weren’t alone, navigating the muddied waters of a short sale without a compass to guide them to legal safety.
